U.K. Nonconforming Arrears and Loss Severities Continue to Rise

Fitch Ratings said that the performance of U.K. nonconforming RMBS continues to deteriorate, with higher loss levels being the key driver behind negative rating action on these deals.

The recession in the U.K. has resulted in house prices falling and unemployment rising, with both factors having a direct effect on RMBS through loss severity levels and affordability. These are considered to be the two main drivers of worsening performance in U.K. nonconforming transactions.

In Q109, Fitch saw a significant increase in loans that were in arrears for more than three months. Along with affordability and unemployment, the interest rate drop has been a driver by artificially increasing the reported level of arrears as a result of the calculation method used by servicers.

A continued increase in repossessions activity, aside from declining house prices, is driving up the volume of realized losses and loss severity.

Prepayment rates continue to decline due to a lack of refinancing opportunities. This is limiting credit enhancement growth that could provide more protection

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